Dividend producing equities remain a must-have within our managed portfolios, despite a sustained period of lagging the UK stock market.
Over the past 25 years the return from the FTSE All Share index with dividends reinvested is threefold the capital return of share prices from the same index. Equity income funds are core holdings within most strategies for investors seeking income and growth
We take a long-term view, seeking fundamental value rather than second guessing short-term market movements. Our typical investors are baby boomers.
The greatest risk to their long-term standard of living is of inflation eroding their capital. As such, portfolios are skewed towards maximising equity exposure within risk tolerance. For those with a long-term horizon, dividend producing equities appear a more enticing prospect than relying on cash or fixed interest.
The valuation gap between yielders well placed to grow earnings in a difficult climate and the cyclicals that have driven the market recovery looks compelling. It is hard to argue with Neil Woodford’s belief we could be at a similar inflexion point to that reached in 2000. I do wonder if too many analysts are missing that the market is creating a pricing anomaly and an exceptional rerating opportunity.
Our portfolios are biased towards companies that will be high generators of cash to grow dividends and that can demonstrate a consistent record of growing dividends to shareholders create loyalty, resulting in more stable ownership and less volatility in these equities.
Detractors will argue over the dangers of the concentration of dividend production within the UK. The top 10 income paying companies account for over 50% of the total income from the domestic stock market. And when you consider the banking sector used to be at the forefront of UK dividend payers and that 12 months ago BP was one of the top income providers in the UK market, the danger of being dependent on a few sectors is clear.
However, the UK market’s concentration of dividends masks the diversity at home and abroad from investing in yield producing shares. We can find a good level of diversification to the UK stock market through our equity income exposure. We subscribe to the value in blue chip yielders, using Adrian Frost at Artemis, combined with the distinctive multi-cap stock-picking approach of Graham Ashby. We are also using the 6% yielding Aberforth Geared Income Trust that hunts in the small caps, for more diversification.